Changes
in Iowa farm financial performance and structure (1997-2001)

In this article, we examine
changes in the financial performance and structure of a group of commercial
farm businesses in Iowa between January 1, 1997 and January 1, 2001. This period
was a challenging one for most farm families, farm leaders, and public officials.
Specifically, farm families experienced:

The introduction, in
1996, of a farm bill that significantly altered the government's role in income
support and supply control.

Two years, 1996 and
1997, of unprecedented farm income.

An economic crisis in
two major importing regions - Asia and Russia - that adversely affected U.S.
agricultural trade.

A dramatic collapse
in 1998 and 1999 of hog prices.

A series of ad hoc subsidies
provided to farmers to compensate for the new farm bill's inability to adjust
supply in response to longer term price declines.

Continuing consolidation
and integration of farms and agribusinesses throughout the agricultural sector.

Increasing pressure
from the government and the general public for farmers to improve their environmental
performance.

The beginning of an
economic downturn or recession in the U.S.

Given all of these economic
shocks, how have farm families in Iowa fared since 1997? The following analysis
provides some insight.

Data
set

The data used in this study
are obtained from the members of the Iowa Farm Business Association (IFBA).
The panel consisted of 633 farms. Farms included in the panel are not representative
of the Iowa farm population as defined by the Census of Agriculture. However,
the panel is probably more representative of commercial family farm businesses
than the Census. Further, the IFBA panel data provide reliable financial and
production information derived from a common farm accounting system used by
all IFBA members.

Measuring
financial performance

Table 1 presents calendar
year summaries for major commodity prices and yields during this period. In
this study, we divide the farmers in the IFBA panel into five equal groups (quintiles)
based on their average financial performance from 1997-2000. The specific measure
that we use to classify financial performance is:

For each farm in the panel,
we calculate average ACI for the four-year period. We then rank the panel farms
from largest to smallest ACI and divide them into five groups of approximately
127 farmers per group. Because each group or quintile consists of the same farms
during each of the four years included in the study this allows us to follow
changes in financial performance and structure.

The financial measure that
we have chosen to rank farm performance is a little unusual. Whereas NFI measures
the profitability (and efficiency) of the farm business, ACI measures the financial
capacity of the farm household. If ACI is positive, funds are available to pay
income taxes, principal on term debt, replace capital assets or expand. If ACI
is negative, the farm business must cover the shortfall either through asset
liquidation, increased borrowing, or equity infusion from family members or
investors. Since we are interested in the overall financial impacts of the past
four years on farm families, ACI provides a more comprehensive performance measure
than does NFI.

Descriptive
information

In Table 2 we present several
descriptive characteristics of farms included in each ACI group or quintile.
Some key changes since 1997 are:

Farms in all five groups
have increased the operator's share of their total land base (owned and rented).
This might have occurred by purchasing or renting more land, by shifting from
crop share leases to cash leases or through inheritance. Since all farms in
the panel increased land, the added acres must have come from farms not represented
by this group. Labor usage declined across all ACI groups.

Changes in farm types
are also apparent. Since the farm types are defined in terms of sales composition,
price changes as well as shifts in enterprise mix can cause a change in farm
type. Overall, however, we see an increase in cash grain farms and a decrease
in grain-livestock operations. By definition, this latter group consists of
farms in which a cash grain enterprise is combined with a smaller livestock
enterprise. It would appear that the grain-livestock farms are dropping their
livestock enterprises in favor of cash grain production. A similar trend is
apparent for pork producers with lower ACI rankings.

Balance
sheet

In Table 3 we present average
beginning year balance sheets for 2001 for each of the ACI quintiles. Figure
1 shows the average net worth for each of the five ACI groups from 1997 to 2001.
Note that changes in market value assets will reflect changes in both the level
or amount of assets as well as market prices. Physical assets may have increased
because of capital acquisition or through inheritance. The data do not permit
us to identify how assets were acquired. Here are some key changes in asset
and liability structure that have occurred over the preceding four years:

Farms in the top two
quintiles, those with average ACI levels in the upper 40 percent, show an
increase in short term assets.

Farms in the lower three
quintiles liquidated short-term assets over this period.

All groups show a reduction
in breeding livestock.

Machinery and equipment
investments increased for all groups. However, there was a significantly greater
increase in the two highest ranking ACI groups.

Land investments also
increased for all groups during this period. Again, the greatest increases
were in the farms ranking in the upper 40 percent ACI.

Overall, market value
of assets increased for all except the bottom 20 percent.

Short-term liabilities
also increased over this time for all groups. The largest increase in absolute
terms came in operating notes and accounts payable.

Changes in intermediate
liabilities were small and somewhat mixed.

Long term or real-estate
debt also increased for all groups - again the top two quintiles increased
the most.

Total liabilities increased
across the board with the greatest increase coming in the 20-40 percent ACI
quintile.

Net worth increased
sharply - slightly more than 15 percent over this period for farmers in the
upper 20 percent group. The greatest increase occurred between 2000 and 2001.

Farms in the next two
quintiles also experienced a gain in net worth, but at a much more modest
level.

The average change in
net worth for farms in the bottom two quintiles, however, was negative. Nonetheless,
farms in the bottom 20 percent only lost, on average, 10 percent of their
net worth over the four years.

Income
statement

The 2000 income statements
are given in Table 4. The time trends for net farm income and ACI for the five
groups are shown in Figure 2. Some important changes in income over this period
include:

Total crop income actually
increased for all five groups over this period. However this is due to the
fact that government and insurance payments increased to more than offset
the loss in the value of crop sales.

Livestock sales changes
were mixed. The upper two groups show an increase in livestock sales - primarily
due to beef receipts. The lower three quintiles experienced a decline in livestock
sales.

Expenses increased for
the top three groups. The bottom two groups experienced a reduction in expenses
particularly in purchased feed.

Rent, interest, and
depreciation, in general, increased for all groups. This is consistent with
the expansion trends noted in the balance sheet.

Net farm income declined
for all groups by roughly the same absolute amount. However in percentage
terms, the decline was significantly higher for the lower ranking farm businesses.

There was a sharp decline
in both NFI and ACI from 1997 to 1998 with the recovery in 1999 and 2000 as
the supplementary government payments kicked in and livestock prices improved.

We also note that there
was an average increase in off-farm income and a decrease in family living
expenditures during this period for most groups.

ACI increased for the
top two groups and the bottom 20 percent. The remaining two groups experienced
a reduction in liquidity.

Dependence on farm program
payments has increased sharply for all five groups between 1997 and 2000.
This dependence increases with decreasing financial capacity or decreasing
ACI rank.

Final
comments

Not surprisingly, the analysis
provides answers to some questions - but leaves a number of others for subsequent
study.

1. Despite falling commodity
prices, farm equity and income were stabilized for all five groups over the
period of study. Stabilization is due, to a large extent, to direct, across-the-board
subsidization by the federal government to corn and soybean production. Recovery
of livestock prices from 1998 lows also contributed to the maintenance of farm
income and equity.

2. For the most part, farms
included in this study appear to have pursued expansion strategies since 1997.
They have expanded their land base and increased their investment in land and
intermediate assets - machinery and buildings. We also observe a net increase
in debt for all farms in the study. At the same time, they have shifted their
enterprise mix in favor of cash grain production and away from livestock. Farms
have positioned themselves to capture farm program payments.

3. What isn't clear from
this analysis is whether or not the farms in this study are better positioned
for a very plausible economic environment that would include reduced federal
outlays, increased environmental oversight, and heightened international competition
in commodity markets. For example, the observed increase in land and machinery
investments may be the result of farmers' expectations that subsidies would
continue at or near current levels. Alternatively, farmers may be viewing the
subsidies as windfalls and are investing funds in capital assets in anticipation
of a period of reduced incomes. This latter explanation would be somewhat more
plausible if debt loads hadn't increased as well. For all but the lowest ACI
group, however, asset value increases exceeded debt increases. We also note
that, on average, farms increased their production expenses more than their
realized increases in revenue - including the direct farm payments.

4. Finally, as of this writing,
the impact of the terrorist attacks of September 11 on the U.S. and world economy
and on our expectations for government are unclear. However, it does seem likely
that expenditures for defense and public safety will increase sharply. Combined
with a recession, it may be unlikely that agriculture can expect continuation
of income support at the levels experienced over the past several years. If
the level and allocation of Federal farm outlays changes, is the commercial
farming sector positioned to withstand or accommodate these changes? This is
an important question for farmers and policymakers alike and merit careful attention
and analysis.